International trade is a usual suspect as a cause behind the recent rise in wage inequality...

International trade is a usual suspect as a cause behind the recent rise in wage inequality in the United States. However, many researchers do not believe that international trade is the main cause.

Briefly explain three reasons for why researchers believe trade is not the main cause.

Briefly explain how skilled-biased technological change is a more believable cause behind the rising wage inequality.

Solutions

Expert Solution

Three reasons that income inequality is not due to the international trade are as follows:

A. International trades has caused economy to expand and created new jobs in the economy. So, demand of labor will increase and income inequality will decrease.

B. International trades brings investment in human capital that raises the skill level of the labor force. It leads to the reduction in wage inequality.

C. International trade brings specialization of trade and it causes reduction in the wage inequality. The trade specialization causes workers to be more skilled in a specific sector.

Skill based technological change, has two effects:

1. First effect that it makes many people out of jobs due to the structural change in technology to be used in a particular sector. It means that the supply of labor increases in the job market and these people are ready to work at lower wages.

2. The second effect is that there are few people who are well versed with the new technology. So, demand of these people will be more than the supply. Due to this imbalance, these people will work at higher wages.

As a result of the above two effects, the wage inequality will increase.

Rahul Sunny answered 1 year ago

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